RBA has no target for house prices, says Lowe

The RBA has joined APRA in stressing its indifference towards house prices, despite flagging risks in the property market and making repeated warnings about high levels of household debt.

Addressing the Australian Business Economists Annual Conference & Dinner in Sydney on Tuesday night (21 November), Reserve Bank governor Philip Lowe said that, according to what he has observed, Australia’s most expensive real estate market has been “cooling”.

“This reflects a combination of factors, including increased supply of new dwellings, some tightening of credit conditions, higher interest rates on loans to investors and some reduction in offshore demand,” Mr Lowe said. “The increasing unaffordability of prices for many people has also probably played a role.”

After providing an overview of housing markets in other capital cities, Mr Lowe added: “It is important to be clear that the RBA does not have a target for housing prices.”

However, the RBA governor said that a return to more sustainable growth in housing prices does reduce the medium-term risks.

“These risks have not gone away, but the fact that they are not building at the rate they have been is a positive development.”

The central bank’s “hands off” approach to house prices is significant, given the level of macro-prudential intervention that has impacted the market in recent years.

Mr Lowe alluded to these in his speech, noting that the latest data suggests that Australian banks have more than succeeded in reducing interest-only lending to below the 30 per cent benchmark.

“These are all positive developments, but it is an area we, together with the Council of Financial Regulators, continue to watch closely,” the RBA governor said.

APRA is part of the Council of Financial Regulators and has also been quick to distance itself from any involvement in the housing market.

Earlier in the year, APRA chairman Wayne Byres told a Senate Economics Legislation Committee that housing prices are “not within the control, nor the mandate, of the prudential regulator”.

“Rather, our role in the current environment is to promote a higher-than-normal degree of prudence — by lenders and, ideally, also borrowers — in both credit decisions and balance sheet strength.”

The Reserve Bank has made repeated warnings about rising levels of household debt at a time when wage growth is slow and rates are at record lows.

“Our concern has not been the stability of the banking system; the banks are strong and they are well capitalised,” Mr Lowe said on Tuesday. “Rather, the concern has been that as the household sector takes on ever more debt relative to its income, the risk of medium-term problems increases. This is especially so when this debt is taken on in an unusually low-interest rate environment.”

One scenario that the central bank has focused on is the possibility of a future shock, causing households to abruptly reassess their past borrowing decisions.

“In this scenario, consumption might be wound back sharply to put balance sheets on a sounder footing,” Mr Lowe said. “If this occurred, it could turn an otherwise manageable shock into something more serious.”